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Kenai borough, Tesoro reach deal on refinery

Kenai Peninsula Borough officials recently signed off on a five-year agreement that sets annual values for property tax assessments on the single most valuable property in the area — the Tesoro refinery.

Two weeks ago, officials agreed to terms on the Tesoro refinery after a dispute about its value landed both sides in Board of Equalization hearings, Borough Assessor Tom Anderson said. The borough and Tesoro previously had a five-year agreement that went through 2010. During that period the highest value the refinery received was $182 million and the lowest was $126 million in 2010.

In 2011, the borough hired an appraiser who valued the refinery at $303 million, which Tesoro disagreed with, Anderson said. Tesoro appeal the assessment and through its own appraisal determined the value at $128 million. The board of equalization decided to set the value at $143 million.

The new agreement uses the $143 million number as a benchmark for a new agreement that is structured similarly to the old, Anderson said.

“This valuation formula is super simplified if you look at the complexities of trying to actually appraise a refinery,” Anderson said. “That’s an extremely complex appraisal assignment and it is a big learning curve for someone to try and understand how an appraiser comes up with a value for a refinery.

“This is a very simplified formula that both sides agree is a reasonable methodology to make changes to that benchmark value on a year-by-year basis that reasonably reflects changing market conditions.”

For 2012, the assessed value came out at $152.5 million. The 2011 assessment resulted in $1.45 million in tax revenue for all service areas, which meant $646,000 for borough coffers, Anderson said.

The provisions in the agreement work by applying two indexes to the property as a factor to adjust the benchmark value year over year to reflect current market conditions, Anderson said.

The first index is based on a comparison of finished product prices with crude oil prices. This index is called a “crack spread” in the industry, Anderson said.

The second index is a year-by-year comparison of the amount of product actually produced by the refinery. This index is called a “crude rate” in the industry.

The first index is a quick way to look at gross margins — the difference between the revenue they earn from the sale of their products less the cost of the crude input, most of which is Alaska North Slope crude, Anderson said.

The agreement relies on a combination of Seattle prices for jet fuel, unleaded gasoline and 380 CST fuel, compared to the Seattle price of Alaska North Slope Crude oil.

“It is looking at that spread in price one year to the next,” Anderson said. “So we are not necessarily looking at what is the value of the difference, we are looking at how much does that change one year to the next because that would affect how profitable the refinery’s operations are from one year to another.”

The agreement also applies a three-year average on those prices — something the previous agreement had — to help smooth out prices. Despite that average, however, Anderson said the value can still fluctuate “quite substantially.”

“So for 2013, we would look at what is that index for 2013, ‘12 and ‘11 and divide that by the average of those indexes for 2011, ‘10 and ‘09 to come up with what’s the factor that we apply to that benchmark value,” he said.

Kenai Peninsula Borough Mayor Mike Navarre said he was comfortable with the agreement after receiving general support from the borough assembly and the state assessor’s office.

Navarre previously asked the assembly for $100,000 to do another appraisal on the property, but the borough only received one response to the request for proposal and never got “an acceptable and final” appraisal from the firm that they contracted with, he said. The borough spent about $25,000 of the $100,000 and the remainder will go back into the general fund at the end of the year, Navarre said.

“We were having a real struggle getting to a defensible and supportable appraisal in the open market,” Navarre said. “We tried to do that to establish the value and couldn’t get there so we negotiated with Tesoro and went back to a methodology that had been used in the past.”